CA Intermediate · Cost and Management Accounting · Service Costing
Apex Transport operates a lorry fleet. For one lorry: annual fixed costs are Rs 2,40,000 (assume 12 months), running cost is Rs 8 per km, and it runs 3,000 km per month. A client wants a one-off trip of 500 km; the lorry will be taken from idle time and the firm needs a contribution of Rs 4,000 above running cost. Which is the minimum charge?
The minimum charge is Rs 8,000. Fixed costs are incurred regardless and irrelevant for an idle lorry, so only the running cost of Rs 4,000 (500 km at Rs 8) plus the required Rs 4,000 contribution matters, giving Rs 8,000.
- ARs 8,000Correct
- BRs 4,000
- CRs 12,000
- DRs 14,000
Explanation
Running cost for the trip = 500 x 8 = Rs 4,000. Required contribution = Rs 4,000. Fixed costs are already incurred and are not relevant for the idle lorry. Minimum charge = 4,000 + 4,000 = Rs 8,000. Adding fixed cost share (Rs 20,000 per month x 500/3,000 = Rs 3,333) would be the mistake.
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